Competition, product quality, and disruption within and across firms: The case of coronary angioplasty

Since the publication of “The Innovator's Dilemma” (Christensen 1997), a number of studies have addressed the concept of disruptive innovation from both theoretical and empirical viewpoints. However, the literature has not converged on a fixed theory or definition of market disruption. This paper aims to add to the literature through offering an empirical study of disruptive innovation in the context of coronary angioplasty.

Coronary angioplasty was introduced in the late 70s and has gradually gained its market popularity as a treatment for ischemic heart disease, in addition to medical management and coronary artery bypass graft (CABG) surgery. Christensen et al. (2009) have identified coronary angioplasty as a disruptive technology and other studies such as Cutler and Huckman (2003) have found empirical evidence suggesting that this is the case. We build upon these previous studies and provide several unique contributions to the literature. First, we develop a method for identifying a disruptive process using data on consumer choices over time, which has the advantage of distinguishing other confounding factors (such as changes in underlying consumer demographics ) from disruption. Second, in addition to identifying disruption, we fill in an important gap in the literature by quantifying the magnitude of disruption and differentiating between within and across firm disruption. Third, we examine whether the rate of within- and across-firm disruption is affected by the relative quality of each service and the level of competition in each market.

Our main data source is the inpatient records and hospital financial data provided by the Florida Agency for Health Care Administration, covering 1988-2010. We take a two-stage approach. In the first stage, we estimate a patient choice model of treatment and hospital.  We use these estimates to simulate the effect on market share if a hospital were to close its angioplasty program.  We define within-firm disruption as the fraction of patients who would have chosen CABG at the same hospital and across-firm disruption as the fraction who would have chosen CABG at another hospital.  In the second stage, we use a fixed effect regression model to examine the effects of relative quality and competition in the CABG and angioplasty markets on our measures of within- and across-firm disruption.

Our main results are summarized as follows. First, in a dual-technology hospital, within-firm disruption is negatively associated with quality of the mainstream technology (CABG) and positively associated with quality of disruptive technology (Angioplasty). Second, within-firm disruption occurs more slowly in a more concentrated market. Third, regarding across-firm disruption, our preliminary results suggest that disruption is positively associated with market competition of the main stream technology, suggesting that competition drives down profit margins of the existing technology and provides more incentive for innovation.